The Stigler Center for the Study of the Economy and the State hosted with the Rustandy Center for Social Sector Innovation, in partnership with the Financial Times, a virtual event discussing whether corporate ESG policies puts politics before shareholder and stakeholders’ best interests or looks out for their long term best interests, with Marianne Bertrand, Jay Clayton and Damien Dwin. The following is a transcript of the event.
Caroline Grossman
Hi, welcome to today’s events. I’m Carolyn Grossman, the executive director of the Rustandy Center for Social Sector Innovation, and adjunct associate professor at Chicago Booth. Today, we’re happy to host the third event in our Unpacking ESG series, which investigates the way ESG is, is not, and could be a force for social and environmental impact.
Our conversation today will focus on the politicization of ESG. In state houses all across America, politicians have proposed or passed legislation restricting states from doing business with companies that practice ESG, arguing that ESG is part of a broader effort for corporations to advance their own political agendas at the expense of increasing shareholder value and unfairly disadvantaging certain industries. This makes it a critical time to ask the question, to what extent are corporations putting politics in the way of their shareholders’ and stakeholders’ best interests? Or are they looking out for their long-term best interests?
The series features global thought leaders from UChicago and beyond, who share their expert insights on some of the timeliest ESG topics. It’s co-sponsored by the Stigler Center and the Rustandy Center at Chicago Booth in partnership with the Financial Times. If you’re not familiar with the Rustandy Center, we’re celebrating ten years as the social impact hub at Chicago Booth for people committed to tackling complex social and environmental problems by promoting innovation, advancing faculty-driven social impact research, launching social ventures, and convening thought leaders and practices that can accelerate social change.
We’re thankful to the Stigler Center for being such a strong partner, and for helping to bring this series to life. The Stigler Center is dedicated to understanding issues at the intersection of politics and the economy and is an intellectual destination for research on regulatory capture, crony capitalism, and various forms of subversion of competition by special interest groups.
We’re also thankful to the Financial Times, our media partner on this series, and especially to the team at FT Moral Money. FT Moral Money is the destination for news and analysis on the role of business and finance in the drive for a fairer, cleaner, and more sustainable world economy. The newsletter offers sharp coverage and commentary on the debate over the purpose of business and of capitalism itself.
We encourage you to subscribe to the Rustandy Monthly; the Stigler Center’s publication, ProMarket, and its Captialisn’t podcast; as well as to the FT’s Moral Money, which publishes three times a week. The relevant links can be seen in the chat function at the bottom of your screen. Now I have some housekeeping before we begin. Please note, we’re on the record and we will post the event video on YouTube later. If you have questions for the speakers, please start submitting them by the Q&A icon at the bottom of your screens, and we will try to get to as many as possible toward the end. As usual, views expressed by guests are their own, not those of the organizers or the University of Chicago.
I’m now delighted to welcome our speakers, Marianne Bertrand, Jay Clayton, and Damien Dwin, and our moderator, Patrick Temple-West. Their full bios can be found on the event page.
Marianne Bertrand is the Chris P. Dialynas Distinguished Service Professor of Economics at Chicago Booth, and co-faculty director of the Rustandy Center for Research, and covers labor economics, corporate finance, political economy, and development economics.
Jay Clayton is the senior policy adviser and council to Sullivan and Cromwell, and former chair of the U.S. Securities and Exchange Commission, the SEC. His practice centers on corporate governance and financial regulatory matters, economic policy, and government relations and investigations.
Damien Dwin is founder and CEO of Lafayette Square, which aims to create investment opportunities in overlooked places and underserved markets. He’s a thought leader on faith-based investing, mass incarceration, and the use of capitalism for good.
Our moderator today is Patrick Temple-West. He’s the governance reporter at the Financial Times, writing about corporate governance and securities regulations. Patrick, over to you, and thank you.
Patrick Temple-West
Thank you, Caroline. Hello, everybody! Let’s start off with an easy one. Where’s everybody joining us from today? Marianne?
Marianne Bertrand
Chicago, downtown.
Patrick Temple-West
Damien?
Damien Dwin
I’m in New York City.
Jay Clayton
And I’m in New York City as well. Damien and I probably should have gotten together in the same spot.
Patrick Temple-West
All three of us could have, yeah, and beamed into Chicago.
Again, thanks everybody for participating in today’s panel. Let me start with an easy one. As we’re talking about ESG, how do we even define ESG? What does that term mean to you?
Marianne? Do you want to start off?
Marianne Bertrand
I would define it as corporations trying to incorporate in their decision-making things that go beyond short-term profit maximization. At least, that’s the way I would like to think about it.
So, thinking about something like the environment, standing for the “E.” There are lots of decisions that a company that is solely focused on short-term profit maximization may not do because it would be costly—especially in an environment where there’s no taxation of carbon emissions—but a firm that will think about longer-term profitability may decide to do by incorporating the E side.
I could make the same argument when it comes to the “S” part, right? Thinking about a company that tries to be more inclusive, there’s some short-term costs that will need to be paid in order to achieve more inclusivity. You’re going to have to look harder to try to find talent. But there might be longer-term benefits for the companies in terms of incorporating these S, these social objectives.
Similarly, when it comes to the “G,” governance, when you think about it in terms of companies, maybe it equals training, the amount of lobbying they do, or how much influence they have on the political process. Short-term, a thing that could be bad for the firm’s profit, in the longer term might be a thing that could actually benefit the firm, and certainly benefits society. So that would be my definition.
I guess I’ll add one more comment. There might be circumstances where a company that tries to incorporate E, S, and G may ultimately earn lower profits even in the longer term. But sometimes companies may decide to do that because their shareholders actually want the company that they own ultimately to incorporate those E, S, or G metrics in its decision.
That would be my definition.
Patrick Temple-West
Great. Thank you.
Damien, any thoughts on the ESG term? And also, tell us a little bit more about your work and about Lafayette Square.
Damien Dwin
I’d say that the term ESG has been politicized, which obviously brings us here together today. At its best, I think environmental, social, and governance is about risk and risk mitigation, and doesn’t necessarily lead you down the path of a conversation about concessionary capitalism. Before we talk about returns, I think you have to think about risk. And clearly, there are some risks that can be identified consistent with things related to the environment, social elements, and governance. But as an investing community, I don’t think we’ve done a good job being very articulate about it. So that’s ESG and the terminology and how I think about it.
The business that I have the privilege of leading, Lafayette Square, was founded in 2020, and we’re an investment manager purposely driving capital to places that are overlooked and underserved. Our thesis is that by seeing more than 50% of our capital go outside of high-income places, we will earn excess returns and actually have lower risk. So we’re place-based. Simultaneously, we also drive better employee benefits to the companies. We finance because we’re in the middle market credit business lending to growing companies in these places with workers who live in these communities and, frankly, suffer the good and the bad that comes with how capitalism works in America. I think capitalism is inherently place-based. And the data supports that observation.
Patrick Temple-West
Great. Thank you, Damien.
And Jay? What is your thoughts on what ESG means, and how we’ve gotten here to this point in the life cycle of the ESG conversation.
Jay Clayton
Well, I think ESG means very different things to different people and constituencies. And one of the reasons why you have politicization, or emotion, is, many people are talking past each other with respect to ESG.
So, there is what I would say, let’s call it the anti-ESG extreme, which is, “In your investing decisions, you can’t take into account ESG factors. You can’t take into account environmental impact.” That’s silly. Okay? If you’re in the energy industry and you’re not taking into account the environmental impact of your business, you’re not doing a good job
At the other end, there are people who say, “You’re managing money, and we’re going to give you a pass on certain factors and their financial impact. In other words, you’re allowed to consider these factors, you’re allowed to invest based on these factors, regardless of their financial impact.” Particularly the case for pension funds and the like. That’s also crazy! You can’t have a myopic investment approach and be doing a good job for those people who you serve. Because, take the example of really poor returns. The company is not going to exist anymore. It’s not going to employ anybody. That’s dumb.
So you have people at both extremes who frankly have what I would say is at best naïve, and at worst poorly disclosed, views of the world.
In the middle, I think this is where we all started. Because, of course, these factors matter in different ways in different places to the performance of a company, and in the way it serves its constituencies, including its customers, its employees, and society generally. So, fundamentally, these things matter. There are people at either extreme that want them to matter or not matter in a way that makes no sense in an investment perspective.
Patrick Temple-West
Great. Marianne? Damien? Any thoughts on what the other panelists said here? Any thoughts on or responses to what Jay wrapped up with there?
Marianne Bertrand
I guess I would just push back a little bit on Jay’s point about, companies that decide to incorporate ESG have this fiduciary duty to their shareholders, and they will be taken out of the market if they were to reduce their profit.
I have a disagreement with that to the extent that some shareholders may ultimately care about investing their own retirement savings into companies that are addressing environmental matters or social matters. Because, to the extent that such shareholders exist—and I’m not someone in a position to quantify how many such shareholders are there out there—how much of a lower return on their retirement would they be willing to accept for the utility, or the pleasure, to invest their money in a company that is actually good for the environment? I don’t know what these numbers are. I don’t know how many of them there are. I don’t know how much of a lower rate of return they would accept. But I very much believe that such shareholders exist. And to the extent that they exist, those shareholders may actually ask companies to invest in ESG.
So, I’m going to push back on the second characterization, the second extreme that Jay described.
Jay Clayton
I agree that there are definitely people who have those preferences. My issue is, very few purveyors of ESG products give those people what I would say is an informed choice. They do not tell those people, “This is how much return you’re giving up,” or, “These are the additional risks.” In fact, some people were selling the opposite, which is, oh, that this is actually going to perform better over time. And that’s unlikely to be true, unless you’re doing it in the way Lafayette Square does, which is, you’re deeply researching a specific industry, the likely transition, and the impact. That’s active investing.
Marianne Bertrand
I agree with all of that, and I think that seems to be more a matter of disclosure than anything else. In particular, I think that was a topic of one of the prior webinars in this series, on the difficulty of actually measuring how good companies are on the E, the S, and the G side of things, which is markedly more complicated than just measuring financial returns.
Damien Dwin
Yeah, I’d love to talk about disclosure, because it’s sitting in plain sight and the data is out there.
I’ll just pick on the leverage finance industry where I’ve grown up. If you study private credit, 50% of the money goes to five states. It’s stunning. This is using SEC data. Half of a trillion dollar asset class goes to five states. And if you look at all 50 states, more than two-thirds, 75% of the money goes to high-income places within all 50 states. So you have this situation where 45 states get half the money, and rightfully say the system is rigged. And they are irritated by any conversation about the fairness of our capitalist system when their lived experience is, they have great employees, great entrepreneurs, but they can’t seem to get a loan at the same price and terms as rivals in Greenwich, Connecticut, or Beverly Hills.
I think that’s an easy example of how we can do things today that are common sense, align with decisions that have been litigated many years ago; 1958, we created the Investment Act; 1977, we created CRA; 1980, we created the Incentive Act. There’s all sorts of existing legislation, regulations on the books. And I think, frankly, the private sector has failed to meet the moment and honor the spirit and intent of these regulations.
If we did it the old fashioned way, we could actually disclose everything we need through form 10-K, 10-Q, and so forth. But a lot of times, there’s gamesmanship and just marketing, as opposed to data science and risk management.
Patrick Temple-West
Damien, can you elaborate a little bit on that, especially for folks who might not be as familiar with the private market space? Because I mean, Jay knew this obviously at the Security and Exchange Commission. Dealing with public companies, public securities, there is more information around there. A lot of retail investors. The journalism, the press, we can see what’s going on there.
But could you elaborate a little bit about your point on how ESG operates, how you think about ESG, in a private market space? Because I do think that’s a differentiation between ESG factors, and Marianne hit about that and ESG scores for public companies. Could you talk a little bit about how ESG is playing out in the private market space?
Damien Dwin
Sure. So, first things first. There’s a lack of hygiene. Goal setting is critical.
The question for any investment manager is, “What promise are you making?” It is table stakes to say, “I will return your capital, and I will generate profits for you,” as a stated goal. But really, when you start to talk about ESG impact, the question is, “What impact do you claim to make, over what period of time? And how will we track and measure whatever it is you say you are doing?”
For my shop we make three commitments by 2030. Number one, we say, “We’ll create 100,000 working class jobs.” I think that is impactful. Number two, we say, “Half of our money or more will be invested outside of high-income places, in places that the US government designates as low, moderate income places.” Again, I believe that is impactful. And the third is, “We commit that we’ll upgrade and enhance the benefits of the workers in the businesses we finance, because we have the wherewithal to influence the uptake of services by workers, because we know a safer, better workforce improves our chances of getting repaid.” We established those 3 goals as 2030 objectives. And we’re held accountable annually to report, to disclose through Form 10-K, the progress we’re making in that effort.
I would say to you, it is stunning how few firms are prepared to publicly own so-called impact objectives in government forms, not in their proprietary impact glossy materials on their website, but in things that they actually file with Jay’s old shop down in DC at the SEC.
Our view is hygiene, best practices, transparency, all go hand in hand. And it starts with, “What are your goals and objectives?” It is table stakes you have to make money; if you don’t make money, you’ll go out of business. But have you been transparent with investors about how you’re tracking good and bad, quarter over quarter, toward a stated goal?
Patrick Temple-West
So Damien also used the word “impact.” And I think that is, you know, Jay, getting back to your opening remarks about some of the confusion in these terminologies here. ESG funds, you don’t necessarily see impacts in their prospectus. These are, they’re using the screens and criteria for identifying companies to pick and choose on ESG terms.
What do you think about that? This difference between impact, that Damien was talking about; and ESG, which seems like it’s more of a screening tool. And is that part of the confusion that you’re talking about?
Jay Clayton
The short answer to your question, Patrick, is yes, it is an example of the type of confusion that I’m talking about. Let me give you what I would say is an investing example of this.
ESG score. Let’s just say there’s a single ESG score. And you say, “If the score is above 10, I’m going to invest. If it’s below 10 I’m going to disinvest. And that’s how I’m going to operate.” Think about that, compared to a single measure of financial performance like EBITDA multiple. EBITDA multiple of 10. “If it’s above 10, I’m going to sell because it’s overvalued. If it’s below 10, I’m going to invest because it’s undervalued.” Any asset manager who told you that, you should take your money out immediately because EBITDA multiples are very different, and should be very different, across industries. So the idea that a single ESG score could somehow, across industries, reveal anything that was related to an investment decision in any meaningful way is, like, insane.
Impact investing, where you’re saying, “Look, I’m going to invest with this type of objective in mind. I believe,” like Damian said, “I believe that opportunity is not distributed equally. But ability is distributed. And I’m going to take advantage of that because I’m going to identify where that ability is and I’m going to provide the opportunity. And I think that we can have better growing companies outside the coasts.” That type of investing makes a lot of sense. You’re having much more sophisticated and nuanced view of what you’re trying to achieve with your dollars than what I would say is a single-point screen which I can’t, I’ve talked to people till I’m blue in the face. You would never invest based on a single EBITDA multiple. How could you possibly invest based on a single ESG score?
Patrick Temple-West
Marianne? Thoughts on the differences in the terminology?
Marianne Bertrand
I don’t disagree with all of this. Again, I think we are making some of the points about the difficulty of measurement, the fact that ESG is an index of many things that are very hard and complex.
Very often actually, there might be contradictions between the E, the S, and the G. A company that might be very good for its workers may not have as good a, you know, maybe they do that at the cost of taking more shortcuts environmentally. So I get all of that. And I also get the idea that some people may decide to invest because their own values are more on the S or the E or the G side, kind of differentially. All of these things are very reasonable. I don’t have a problem with any of this.
Patrick Temple-West
Marianne, how did we get to this “woke” conversation that started to bubble up last year and then intensified? How did we get to a point where we’re having a discussion here about, is ESG “woke capitalism” or not?
Marianne Bertrand
I don’t know how we got there. I’m not sure. There’s certainly a sense that a lot of the political class has been making great use of a lot of the acronyms that have been used over the last years, whether it’s ESG or GEI and all of that. I can give my own sense about how we are there. I’ll use the environment. I think that is really the easiest one for me to talk about. I might also talk about the others. But let’s talk about the environment. I think most of us would agree that we are really facing a crisis when it comes to the climate. And I think every day that we wake up, it seems like we have more news that suggests that, indeed, we are on the verge of really an environmental, massive environmental crisis when it comes to climate change.
When I think about the models that we have in economics, this would be a classic example of an externality that needs to be priced in. That we need to make sure that firms maximize, if they are going to be maximizing profits, do it understanding that whenever carbon is being produced, there’s a cost to that. And that should be translated into some form of a tax, or cap and trade system, or something like that. We have in the US—clearly in the US, maybe less so in Europe—faced an impossibility to really try to get such tax on carbon being voted on by our Congress. Why we are there, I think, is obviously important. I would tie that back to a lot of the things that the Stigler Center talks a lot about. Issues of regulatory capture. The imbalances between the amount of influence that corporations have over the lawmaking process, the rule making process, compared to us that are going to be the ones receiving the consequences of climate change.
Whatever the reason, we are not seeing those taxes being passed. And a lot of people at home really want to make a difference. How exactly as an individual, as a citizen, can you make a difference when it comes to trying to make some progress on the climate? Well, I would say that ESG investing is one way. I think one of the only ways that we have as investers, as individuals, to do that is asking the corporations in which we are putting our retirement to do the right thing and stop being as polluting. And really think about transitioning—quicker than they would do if they were solely focused on profits—towards energy that would be more long-lasting. Investing in renewable energy.
So this is kind of my sense of how we got there. I mean, I can, maybe I’ll stop there and let some other people speak.
Patrick Temple-West
Damien and Jay? Same question for you. We’ve sort of described ESG and the challenges with the terminology. But how did it become enmeshed in this “woke capitalism” political discussion? Go ahead, Jay.
Jay Clayton
Look, a number of factors. One is, lumping E, S, and G together as a single perspective on investing makes no sense. Okay? They’re very discreet areas of inquiry that vary from company to company. You know, impact can be S. Impact can be E. Different types. The governance, that’s very different. That’s about how decisions are made, not the substance of the decision-making. So, lumping them all together makes for a lot of confusion.
To the very good point made about the environment. What I would say is, if you believe (like I do) that carbon reduction makes a lot of sense, the most efficient way to deal with that is a global carbon tax that escalates over time, facilitates a transition. The idea that ESG investing as it’s currently practiced is anything close to that first, best economic solution is also absurd. I mean, let’s just look at the effects. Over the last 20 years, the US and Europe have outsourced basically all dirty manufacturing to the rest of the world. Net, we may have actually increased carbon. No one talks about that.
Marianne Bertrand
Obviously, a global tax on carbon is the first, best solution. I think just saying that we’re going to wait for that to do something about the environment seems highly, highly unrealistic, given that it’s not going anywhere.
To your second point, I very much agree and I want to stress that, that a lot of the screening out of dirty industries and investment decisions may have indeed backfired exactly along the way that you describe, by getting us to outsource things, moving dirty energies out of the public markets into private markets, the set of things that have been very negative.
But we all agree, that’s not the only way to do ESG. It’s not just about negative. You may also ask companies, actively ask companies to be less polluting.
Jay Clayton
No, I agree.
But as I walk around—and I’ll just say this real quick example—as I walk around and I see people pushing aluminum or aluminium strollers (depending on how you say it), all you got to know is, that was produced with dirty energy. Because that’s the only place you produce that stuff.
Patrick Temple-West
Maybe it was recycled.
Jay Clayton
Nope.
Patrick Temple-West
Yeah, probably not.
Damien, any thoughts on this?
Damien Dwin
The only thing I’ll add, because the original question was about, “How did we get to woke capitalism, and the pushback, and the political hostility?” There is another unaddressed irony in all of this, which is the money controlled by the states, the public pensions that have been most vocal about some of these topics.
I’m talking about money from cops, firefighters, bus drivers, school teachers. My dad was a bus driver. That money tends to get exported to places like California and New York. So, think about being a CIO of a public pension fund, being on record that you won’t be a part of any sort of “woke ESG” anything. Your constituents are ignorant to the fact that you don’t invest in your own state. You export your capital to one of the big five—typically New York or California—seeking returns elsewhere because you don’t believe in investing in your own home market.
I like to follow the money. And I believe in in data. It is interesting how there’s an inconsistency between the rhetoric of officials who sometimes want to be on the right side of the optics of this conversation, as compared and contrasted with how they actually move the money of constituents, who care deeply about the place where they live and about seeing opportunity and economic mobility in their community.
Patrick Temple-West
And your point there, Damien, is that a pension fund in the middle of the country is investing, is buying shares in Apple. Is that what your point is?
Damien Dwin
Or one of the oligarchs in the private capital business. You basically have an industry where you’ve got five to ten firms who control 250 billion to a trillion dollars each, most of it in private equity, private credit, real estate. And those firms are not headquartered in Louisiana. Iowa. They’re not in the Florida panhandle or Alabama. They’re not in Utah. They are on the coast—ironically, based on the data—putting a lot of money into companies on the coast, skewing toward high-income places. And I would say to you, that is inconsistent with the agenda of firefighters, police officers, school teachers, nurses, doctors, who worked really hard to sock that money away, and want to have a safe, productive future in their own home market. So that’s the dichotomy.
Patrick Temple-West
As the “ESG woke” conversation has evolved, it’s starting to spiral out and hit individual companies. How do you think, how are companies today thinking about political risk, reputation, reputational risk? Versus how they thought about political risk previously in terms of higher taxes, higher regulations, coming from one particular political party versus another?
Marianne, do you want to pick up on that?
Marianne Bertrand
If I were to think about the way companies have managed political risk historically, it’s been by protecting their bases. So if you were to look at PAC giving, which would be a trace of, like, a company is more involved with giving money to right-wing politicians or left-wing politicians. Most companies look like they give about 50% of their campaign contributions to right-wing politicians and the other half to left-wing politicians. I think that has been the main way to manage political risk historically, is that, whoever gets elected in government, you have friends on both sides. And whenever you need something, you’ll have people that you know that you can approach.
When it comes to the ESG side of things, maybe I’m going to say something, I don’t want to make it sound like it’s in contradiction to what I said before. I do see a lot of promise in the idea of companies trying to do the right thing, and being asked by shareholders in particular to do the right thing. But I think a lot of what’s happening right now, when people are looking at these “woke companies,” it’s very much consistent with these companies just trying to maximize their profits, and nothing else different than that. So, I think that Nike is deciding to “be woke” because it pays to “be woke” for Nike, given the customer base that they have. I don’t think that there’s an actual risk that Nike is facing when it decides to support, say, Colin Kaepernick or have a stronger D&I agenda. It’s what’s consistent with the bottom line, and with what’s going to be maximizing their profits.
I think some of the tension that we observe right now is that a lot of politicians are looking at these “woke companies” and saying, “Well, these companies are woke, and that’s a reflection of their preferences, their own private preferences, of the CEOs of these firms.” And I think in most cases, it’s just not that. I think these companies are making what is the right calculations in terms of how woke or unwoke they want to be in terms of maximizing their profits.
Damien Dwin
The only thing I would add is, I’m seeing it already, the capital markets are going to reward companies that do a better job with labor and do a better job with local communities. I think the conversations that matter, and the topics that our grandchildren will talk about, will relate to human beings having full employment. Good jobs, not just any job. Economic mobility is rooted in quality employment, and we have to see that appear in all 50 states. It cannot be limited to high-income city centers or rich places. It has to be a real possibility everywhere. And I think if you get that right, the capital market is going to start to reward you with a lower cost of capital and greater availability of capital.
That transition is taking place now. It required data science and additional transparency. But I believe that is the direction of things potentially for private credit, private equity, real estate, and some of these other big, trillion dollar asset classes where public and private market investors are saying, “I’ve got to make returns. But why can’t I make returns in my own community? Why can’t I make returns in a way that helps labor practices so that we can get more people, particularly low wage workers, on a better path in this economy?”
I think the private sector has a lot of water to carry in this area and cannot rely upon government intervention, yet again, to encourage the behavior. I think the private market needs to get the joke. And we’re starting to see greensheets.
Patrick Temple-West
Jay, thoughts on the reputational risks for companies? New phenomenon here, or is it just like the historical reputational risk that we’ve seen in previous iterations?
Jay Clayton
I think Damien put it very well it. When you, as a company, look at your employees, your community, your customers, the things you know well, and you look to service them for the long term, you’re taking very little political risk, and you’re doing a good thing.
When you stray beyond those constituencies into areas that you don’t know and really can’t impact, you’re taking risk because you’re wading into an area where you can have very little impact. You don’t have a lot of knowledge. And there are lots of other people who emotionally care. And we’ve seen some of that with companies being aspirational, going beyond those things, and wading in where it’s really not core to their business.
But let me say the other side. Everything Damien said is right. It is core to your business to service your community. It’s core to your business to train your workers. It’s core to your business to understand who your customers are and what their preferences are.
So it’s not an all or nothing. It’s doing those things in the areas where you can have an impact.
Patrick Temple-West
Jay, let’s start with you. Do you think these attacks on companies, is this having bottom line implications for companies? Or is this just sort of a reputational risk that they can ride through without too much trouble.
Jay Clayton
No, I think undoubtedly you see areas where it’s having an impact on companies. I think Anheuser-Busch, they had the number one selling beer in America. Will that last or not? How would they recover? Let’s see what it’s going to take to manage it. And I think if you asked anybody, “Is that the way they would have handled this issue if they had it to do over again?” they would say, no.
Marianne Bertrand
There, I would very much like to disagree.
I think that most of these companies actually, when they decide—and I view this more as a case of marketing than really, like, real ESG—but I think most of these companies are handling this like they’re handling other marketing decisions. Maybe in this particular case they didn’t have their customer base really well worked out and it ended up backfiring. But, my gut is that most companies that decide to say things that some people will call “woke” do it in a way that is very much consistent with the way they would decide on what is the best marketing campaign they can come up with. And that it benefits them, ultimately.
Damien Dwin
I would just add, the party that is most at risk is actually not corporate America. I think you’ve got to follow the money. I think pension funds, endowments and foundations, insurance companies, are going to find themselves held accountable for exporting capital outside of communities that they should have been supporting and investing in things that undermine quality labor practices. And I think that will be the real scandal here.
I think companies have a way of figuring stuff out and moving. What we know of institutional investors is that they aren’t as swift. And when the punishment comes, I think it’s going to be jarring to the system.
Patrick Temple-West
Is there anything that companies should be thinking about proactively to manage this evolving reputational risk? Anything that the companies, I mean, to give you an example. We had a big gathering of board directors from some well-known brands that everybody would recognize here. And they’re really uncertain how to answer or resolve this new political risk here. Everybody is worried about being “Disneyfied,” is the term that was thrown around.
Are there any things that that companies are thinking about, maybe should be thinking about, to defuse the situation, mitigate these reputational risks?
Damien Dwin
Well, I think there’s a big difference between offense and defense. The subtext of the question was, “How can people be defensive?” when in fact I think this is a huge economic opportunity for corporations that are savvy enough to play offense. And I’ll give you a live example.
The Biden Administration just put through one of the largest economic packages any of us will see in our lifetime. Between IRA and CHIPS, you couldn’t have more money flowing out of Washington, DC.
Patrick Temple-West
And infrastructure, too. Three big pieces of legislation.
Damien Dwin
When you read these bills, it is crystal clear. Washington, DC, left and right, have said in writing: Create jobs in overlooked, underserved places. Provide job training so we can get workers skilled up.
It’s there. It’s not hidden. The question is, those corporations who understand, “Hey, if I do a good job promoting economic mobility and driving capital to overlooked underserved places like West Virginia or parts of Arizona, it’s no longer about Joe Mansion and Kristen Cinema. It is about human beings in West Virginia, and Arizona, and countless other communities around this country where capital has historically not flowed with the same fluidity.” And if you are smart, you can now partner with the largest economy on earth to create jobs.
So, DC has put the bait out there. And now we have to see how the private sector reacts. But it’s rooted in some very simple principles, like let’s get money outside of high income places. And let’s make sure we provide job training to workers at all tiers of the income scale.
Jay Clayton
So I agree that companies should play offense. And they should play offense in the areas that they know well, like worker training, skills training. I have long advocated for tax credits or other subsidies for skills training, and I think we should do that without a doubt.
Where should you be careful? Areas where you don’t know, and can’t have an impact. It’s very aspirational to say that the activities of any one particular company are going to have an impact on the environment. It’s almost fantasy. The idea that the airline industry could be carbon neutral 2050 without a carbon transfer market developing is fantasy. So you have to be candid and honest about what you can accomplish on your own and what you can’t.
In the communities you serve, the employees you have, the products you produce, you can do something. The rest of it depends on a great deal of coordination across the economy. And I think companies should be honest about that.
Marianne Bertrand
I think it’s also really a matter of what the customers of these companies want, and what the employees of this company want. I tend to very much think about ESG in light of companies that are really just trying to maximize their profits. And that’s also about trying to attract the best talent, trying to have customers to be loyal to you. And companies are doing the thing that they feel they need to do on the ESG side to try to attract these young people, the young talent in the economy, and to try to retain those customers. And that may get them sometimes to be active in areas where maybe they don’t have so much experience.
Jay Clayton
Let me make a G point here. And it’s very important.
A lot of G is about resolving, dealing with, understanding different perspectives. There’s no monolithic customer. There’s no monolithic employee. There’s no monolithic shareholder. Shareholders have a lot of different views. Employees have a lot of different views. And the reason the board of directors exists is to listen to all of those various views and try to find the best common way forward. It’s the same way for management teams with respect to how you deal with employee issues and the like.
One of the things about ESG investing is, it doesn’t really emphasize the G enough, and the fact that there are multiple different views on how to run a railroad. And what G is is the process for resolving those. You can’t make all your kids happy all the time. Not every kid. You have three kids, not everyone can sit in the front seat at the same time. Right? You’ve got to deal with that. And that’s what G is for, and we forget that.
Patrick Temple-West
Hear, hear! Yes, G should be the first one: G, S, and E.
So, we have so many questions coming in from the audience that I can barely keep up. A question about the ESG labeling. And this is again something that we’re hearing that asset managers are wrestling with, and boards are wrestling with.
“Are you seeing a trend away from ESG to more specific terms, such as ‘sustainability’, ‘innovation’. Do you think the term ‘ESG’ will depart from the corporate vernacular?”
Damien Dwin
It very well might.
We don’t use the term in our collateral material. Full stop. We have explicit 2030 goals and we disclose how we’re tracking toward those goals on regular intervals in our SEC filings. But I don’t need the term. I don’t need the rhetoric. I need the performance, and I need the transparency. Everything else I’ll leave.
Marianne Bertrand
I think the label is just a fad, and the cycles keep on going. Back in the old days we used to call it CSR, now we call it ESG. It seems like ESG has become politically sensitive, so I can very well imagine that we’re going to move toward something else. It doesn’t, well, I’ll just leave it at that.
Patrick Temple-West
And SRI, the socially responsible investing, another acronym precursor.
Jay, do you think the term ESG, in 2024, Chicago Booth won’t be having an ESG woke panel?
Jay Clayton
Unfortunately, and I think it’s very unfortunate, I think it’s a term that will continue to be used. Hopefully, people offering investment products explain that this is much more complicated than a single term can encompass. But it has entered the public lexicon. And I fear that we’re going to be dealing with the term—and talking past each other—for some time to come.
Patrick Temple-West
Another question from the audience here.
“Would it be fair to say ESG is criticism of business as usual?”
Marianne Bertrand
I think it’s a criticism of businesses that are focused on, I’ll keep pressing the contrast between short-term and long-term profit orientation. My favorite way to think about ESG is that it’s really businesses that are trying to maximize profits, but over an horizon that goes beyond the next quarter or the next six months. And whenever you think about the kind of decisions you would make when it comes to maximizing profits over a longer-term horizon, then things become very different. Then you really start thinking about the environmental footprint. Then you really start thinking about the value of investing in workers. All of those things. Then you really start thinking about supply chains.
All of the things that look like they cost money in the short-term, that unfortunately a lot of our, especially, public markets push firms to be very short-term related. Those things that may not make sense in the short-term start making sense in the longer-term. And in my mind, that’s the easiest way to think about what ESG is.
So, I think it’s a pushback against short-term profit orientation.
Jay Clayton
I’m not saying I disagree with that. I think that’s a lot of the motivation.
I have another theory on it, which is, why are we so interested in the private sector dealing with these issues? Dealing with better skills training? Dealing with the environment? Why are we so interested? Because government has done a really poor job. We have a Department of Labor. We have a Department of Energy. We have a Department of Education. And they’re not doing a good job. We all know, let’s put it this way, we all know that it can be improved. We all know that the environment can be improved. We know that our education system is failing a lot of people. We know that worker skills training is not what it should be. And we’re looking for answers.
And I think that we feel like if we push this to corporations, we’re going to get better answers. So it’s a little bit of both.
Damien Dwin
Yeah, just to push back as a native Washingtonian, son of a bus driver, born and raised in the district. Jay, you know that there are a lot of people who would say government has done it’s very best, and government has been very consistent.
It is Wall Street and the private sector that has failed to meet the moment. And that would be rooted in a couple of things. One, we’re coming off of a forty year bull market, where rates went from the mid teens to zero. Now we’ve bounced up to 5%. And forty years on, we have a report card on how corporate America has shown up in these areas without government intervention using sticks, not carrots. Meanwhile, corporate America isn’t even corporate America anymore. We know, of the five largest employers in the United States, private equity represents three of the five seats.
So the whole industry has changed. The whole world has changed. And we’re coming off of a forty year sugar high where we know economic mobility is not what it is supposed to be: 50% of American workers live check to check. They don’t have $400 of liquidity for an emergency. The level of financial insecurity is stunning. And, based on data from the Department of Commerce and Labor, when you stratify the earnings of American workers, if you’re in that bottom 80th percentile you don’t even use your health care or retirement products offered by your employer because your wages aren’t high enough.
So we kind of have a report card on the private sector. It’s not good. Government is not going to be the answer. The private sector has to change its ways and find a way to profitably align with local communities and workers.
Marianne Bertrand
One more thing there. I just find it very, very difficult to have this conversation. I very much agree that the first, best would be for government to invest in workers, governments to fix our schools, government to put more resources into communities that are not getting enough of them. But this is not happening. And it’s not just by chance this is not happening. Things are not happening because of the process of influence on the decisions that government is making.
And in part, this is where I get the most uncomfortable with the whole ESG conversation, which in many cases is very cynical and feels like marketing. Companies that are pretending to care about, you know, black communities, and maybe selling more sneakers because of that. But at the same time lobbying very hard, either directly or because they are partners with the chamber of commerce, so that we don’t have an increase in minimum wage at federal level, while it’s the same black communities that would be benefiting.
I think we cannot simply just say the government is not doing its job, and so we’ll ask some companies to do it. Companies play a big role in having the government not doing the things that a better functioning democracy—where you would be really one person, one vote, and money would not matter so much for outcomes—would make very different decisions.
Patrick Temple-West
Okay, I had one follow-up question from something Marianne mentioned earlier, and it comes up frequently in the ESG conversation. It’s this dynamic between short-term thinking and longer-term thinking.
Short-term thinking, “Okay, invest in whatever you can. Companies have to report for shareholders every three months.”
Long-term argument on ESG is, “Well, if you’re an insurance company and you continue to underwrite oil and gas companies, they stay alive, they emit pollution, and eventually they’re not going to have coastlines anymore, and insurers are going to pay all these catastrophic claims.”
How do you come down on this short-term, long-term conversation? Is the long-term, I mean, the future is uncertain, so could the long-term conversation argument from the ESG crowds, does that kind of muddy the narrative? Muddy the argument? Where you could just say, “Well, everything can, if climate change and global warming is real, everything could potentially be an ESG risk.”
Does that make sense? I’m just trying to feel out this dynamic between the short-term concerns and the long-term concerns.
Jay Clayton
Well, this is where I go back to my point, and let me let me follow up, it is a public-private partnership. Our economy is 22 odd percent government right now. The idea that it’s one or the other is a little bit crazy.
I think that government needs to play a better coordinating role in these issues, for the reasons you stated, Patrick. It’s a global competitive economy. You’re going to make decisions based on what your competitors are going to do. That’s part of decision-making. And that’s where government needs to step in and deal with this.
So, like I started. If your view is, “I need to use more expensive, cleaner energy for my business,” and someone else is going to use less expensive energy, you’re going to be at a disadvantage. And the question is just how much of that do you take going forward without government coordination? That’s a very uncertain decision-making environment.
Patrick Temple-West
Damien or Marianne? Just to follow up on the short-term versus long-term question. How do you come down on that? And how does that thinking, long-term/short-term, influence the ESG conversation?
Marianne Bertrand
I’m happy to go first. As I said before, when I try to think about why companies would focus on more than just pure profit maximization, one way that I have to think about it is, you know, we always like to talk about Milton Friedman, who tells us that companies want to maximize profit. One way I think about the ESG simply is, ESG is just what Friedman is asking us to do. He’s asking us to think about profits in the longer-term. And when we think about the longer-term, a lot of investments that do not make sense short-term start making sense. Let’s keep on with investing in workers, sustainability, and all that. That is certainly one of the easiest ways for me to think about what it means for a company to try to feel like you also have an impact, a social impact.
The other way to think about it is because some stakeholders are asking the company to do those things on their behalf. Customers asking the company to be good on the planet, and they are willing to pay more money for their cup of coffee because the beans that are being used are sustainable. Shareholders asking the companies to do more than just maximization. Employees asking the companies to do more than profit maximization. And the companies do those things because that allows them to retain workers, attract talent, sell more whatever widgets they’re selling, and so on, and so on.
In my mind, these are really the two frameworks that I find myself using to think about the whole ESG domain.
Patrick Temple-West
Just to pick up very briefly on Marianne’s point. When we had the board directors in the other week, there was something that they mentioned, too, is this need to retain younger workers, and using ESG or a corporate sustainability plan as an important long-term investment.
Damien Dwin
A hundred percent. In our experience, we have to make money. If we don’t make money, we don’t raise money, we don’t attract good companies. Capital has to flow, and capital flows because of performance. Performance has to be every 90 days because investors want dividends, and you can’t make the dividends if you aren’t profitable.
Meanwhile, concurrent with that, there is this evolution that I see taking place in investment management and corporate America, where it’s the duality of using balance sheets and using data science and services, simultaneously. You’ve got to have money to be a player. But do you have the knowledge to make wise decisions? Case in point, it should be common knowledge that 50% of capital and private markets flow to five states. It is not. It should be common knowledge that 50% of American workers live check to check. It is not. There’s so much additional data when you go deeper as an investment manager.
If you have that balance sheet, plus data science, then you can bring services that meet the moment for workers and communities without sacrificing returns. In fact, you can be return-seeking and make premium returns because you understand how to navigate these waters and identify arbitrage.
Patrick Temple-West
Marianne brought up Milton Friedman, and that segues nicely to a question that has come in from the audience.
“Are corporations only responsible to stakeholders? If backlash against ESG has hurt some shareholders, how is the pursuit of ESG goals aligned with Milton Friedman?”
Marianne Bertrand
I’m happy to start. I think there’s a lot of consistency between the pursuit of ESG goals and Milton Friedman. Again, I’ll start with the longer-term versus short-term. I think we all got the short-term.
The long-term orientation of maximization means doing things that you would not do otherwise. There’s also absolutely no inconsistency between incorporation of ESG goals if it’s because your customers asked for it, or your employees are asking it, because all of that would also translate into higher profits. And then, finally, there’s no inconsistency with Friedman to engage in ESG because your shareholders are asking you to do it, even realizing that they may trade-off the social impact for lower returns.
The only thing that Friedman is saying is that the CEO of a company is essentially working on behalf of the owners of the company, the shareholders, and you should do whatever the shareholders want. Friedman just has this very narrow view, that shareholders only care about maximization of profits. But shareholders may have different objectives than profit maximization when they realize that they need the company to change things for them to achieve the goals that they have, their personal goals. So a lot of what we call ESG is very much consistent with Friedman, not to say that Friedman holds the truth of the way the world should be working.
I think the one thing that is inconsistent with Friedman, and it’s very central to the whole politicization right now, is the view that it’s the CEOs of these firms, it’s the CEO of Disney that is deciding that Disney is going to be a woke company. It’s the CEO of Nike that is saying that Nike is going to be a woke company. That it’s what they like personally. In my sense, that would be very inconsistent with Friedman. That would really be the CEO hijacking the company to achieve his or her own personal kind of objective. But that’s, a very small share of the ESG that’s happening in the economy right now is of that form.
Patrick Temple-West
Others on this?
Jay Clayton
So I think this discussion illustrates something that we’ve been talking about, which is, taking into account these issues is very idiosyncratic. And I think some of the tension is caused, and it’s very idiosyncratic, it can be because you have a profit-maximizing shareholder. It can be because you have a shareholder who’s cared about long-term profits. It could be a shareholder who’s cared about profits and other things. One of the reasons why we have the management structures that we have is to reconcile those differences. Part of what I would say is the inefficiency, and driving unsatisfactory views of ESG, is it ignores those different preferences within a corporation. It ignores those different preferences within the customer base. And it assumes there’s just one path forward to deal with these issues. And that’s, I’m not saying that’s… You have to take an input from all of these constituencies. And you can’t solve for one person’s objective function. You have to solve for multiple objective functions.
Patrick Temple-West
Damien? Any thoughts?
Damien Dwin
I don’t think there’s a lot to add. I would just point out the prior point made by Jay, regarding public-private partnership.
There’s a reason corporations have shareholder votes and boards of directors and an SEC. I think if we use our existing tools more wisely, there’s a lot of ground we can cover. But it speaks to intentions. And if we honor and respect the intentions of legislation, recent regulation, we could cover a lot of ground. But we have people who, frankly, have some bad intentions and have to get rooted out. Investment performance is table stakes, we all agree. You gotta make money. So we can’t say it enough. You have to make money.
The next question is, are you behaving with integrity? And are you being transparent?
Patrick Temple-West
Third question from the audience is dealing with the legal and SEC requirements for ESG.
“How should companies be thinking about describing their ESG efforts in regulatory filings? What legal ramifications might they face in terms of potential greenwashing?”
Damien Dwin
I’m happy to go first. And obviously, Jay ran SEC. But as a registrant, you know, somebody who’s filing documents down there, there are plenty of opportunities to say what you need to say, based on the existing rules. Form 10-K totally lends itself to stating your goals and objectives and your intentions, as a corporation or as a manager of capital. If you just want to tiptoe around it, and not say much, and treat it more like a Supreme Court hearing to give vote on to the High Court, that’s a totally different thing.
But I think there are existing tools that allow you to be on record about who you are, your identity, your track record, your intentions. And this stuff goes back over 80 years. It’s been in place for a very long time. It’s just a function of, do you want to be honest and transparent, and live with the ramifications that come with lying to the SEC? I don’t think anybody should lie to the SEC. But if you have a truth to tell, the SEC, in my experience, is not looking to slow you down. In fact, you have plenty of opportunity to do it in a very trusted, known format.
Jay Clayton
Look, I agree. When I was in charge of the SEC, we adopted human capital disclosures, requirements that had been talked about but never put in place.
What those disclosures require is, how do you, as a company, look at your human capital, the development of it, the recruitment of it? What I would say is, for creating an environment where people can improve. What metrics do you use? And tell the investing public about it. My own view was, that was a much better way to approach it than to have a single template for how you talk about your employees.
And I’m actually quite pleased with the disclosure that we’ve seen from the companies who are using metrics and who are talking about it. And now investors have the choice. If a company doesn’t do it, they can look at that in one way. But if a company does do it, they can say, “Look, this is how they think about their workforce. This is how they measure it. This is how they measure satisfaction.”
So what I’m saying is, I think we tried to move that ball forward in a way where you could really understand how a company looks at it. And I’m hopeful that that will continue to be the case.
Damien Dwin
Companies and funds, Jay. That would be the twist I would put on it. You change the landscape when the question is, “Are fund managers embracing it as much as those progressive corporations who are embracing it?”
Jay Clayton
And you raised a great question. Are the fund managers actually looking at it? Okay, like, we went to a lot, you know, broke a lot of glass to get that in place. And the question is, are people really looking at it? Or were they just talking about wanting it?
Patrick Temple-West
How does that play into the climate disclosure rule the SEC has proposed. Do you think that is, again, is that something that asset managers have asked for? More climate-related disclosures?
Jay Clayton
Yeah, let me jump in on that. Exactly the same thing. The climate disclosure rule that I advocated, not just in the US but across Europe, was, “Let’s pick a target—like carbon neutral, 2050—and each company should disclose what complying with that target would mean to them, and their strategic plans for getting there, and whether they needed assistance from others to be able to do it.” That is much more meaningful disclosure then this GHG nonsense. It goes back to my EBITDA point. Your GHG number is probably of very little relevance within your industry, and certainly of no relevance across industries.
Marianne Bertrand
Can’t you take those greenhouse gas emission numbers and index them to the industry? Once they are available, you can figure out how a company is doing compared to their peers in the same industry. No?
Jay Clayton
It depends on how vertically integrated they are. It depends on where their transition is. It depends on where they operate. It’s like, I asked actual investors, you know, not people who want to respond to an environmental mandate, but people who are looking at the prospects of a company. Not really.
The disclosure that I was talking about? Much more relevant. And much more consistent with an overall transition.
Patrick Temple-West
And, to unpack that, Jay, you would put a deadline at 2050, and then ask the companies to disclose how they would work backward.
Jay Clayton
Yeah, how would you get there? What does it mean? Because if the objective of these GHG numbers is to say how prepared is a company for a pending transition, it’s not very useful.
But if you ask companies, they can do a deep dive into what their industry looks like, what their suppliers look like, what their competitors look like, and say, “What would it mean if we actually implemented this policy, regionally and globally?” That would be really valuable information.
Patrick Temple-West
Damien, Marian, do you have thoughts on that question?
Damien Dwin
I just want to point out this this type of progress—and I consider it progress—out of DC has come across Republican and Democratic administrations. Going back to the point made earlier, I don’t think DC is the problem here.
I think the private sector solves all sorts of complicated problems every day, and in this area has pled ignorance and a lack of skill and aptitude. And I just don’t buy it. I think investment managers and corporations can rise to the occasion. And there have been plenty of incentives—from Republicans and Democrats over many years—provided to see that the right thing is done. This comes down to intentions.
I don’t believe the fear of getting in trouble with DC has ever been manifested. A fund manager, a corporation that intended to do something good—Marianne has given multiple examples—they’re not punished for disclosing things and setting clear goals.
We can have a conversation about greenwashing. That’s totally separate from what I just described.
Jay Clayton
I agree. And I think that this kind of conversation is exactly what we need to be happening, which is really based on getting good information out to investors in the public about how their capital is being used.
Patrick Temple-West
Marianne? Final thoughts on that that you were trying to make.
Marianne Bertrand
Oh, no, I think it was not central. I just wanted to push back. I think I understand the difficulty of, like, especially Scope 2 or Scope 3 greenhouse gas emissions disclosure. But I think they are very much an important step in the right direction. I think investors will want to realize that some companies are really entangled in some kind of supply chain that’s going to make it much more costly for them to become carbon neutral.
And I think these numbers provide this information. They enable investors to monitor progress. Those numbers are being disclosed on an annual basis. So I don’t feel as negative as Jay is about that type of disclosure on the E side. That’s what I would say.
Patrick Temple-West
Great. Well, Marianne, Damien, Jay, thanks very much for your time.
Caroline, how did we do?
Caroline Grossman
Thank you Marianne, Jay, and Damian for your time and insights today. I think we could keep going for another hour, but time is up.
This was the final event in the three-part Unpacking ESG series. Recordings of the events will be available on YouTube. So please do follow the Rustandy Center, the Stigler Center, and the Financial Times for upcoming events on topics like this, and more. Thank you all again for joining.
